Thursday, January 22, 2015

I recently just wrote a blog post over at my applied econometrics blog (Econometric Sense) about fat tails and risk modeling. At the end of the post I mentioned Nassim Taleb's paper regarding the precautionary principle and GMOs (Jayson Lusk has a nice discussion of this on his blog as well and Nassim was a guest with Russ Roberts recently on EconTalk) as an example of one related application. If we boil down the concept of fat tails, we are basically talking about the probability or frequency of some extreme event being higher than what we would expect under 'normal' circumstances. Here is a nice anectdote from the models and agents blog:

"It’s 10am, your rottweiler has just chewed your Italian
leather boots, your wife has burnt your pancakes and your mistress is on
the phone proclaiming that “it’s over because, really, you’re pretty
lousy in bed.” Oh yeah, and while you’re at it, your broker is leaving
you a message that the stock market is crashing and you’ve lost a third
of your savings. A bad hair day? No, my friend. You’re likely living in a
fat tail!..."

So in his paper, Nassim and his coauthors work through some pretty complicated mathematics and based on definitions related to things like fat tails, fragility, ruin, harm, uncertainty etc. (in the appendix) conclude that what they refer to as a non-naive version of the precautionary principle should be applied to GMOs.

I probably need to read the paper again and spend more time in the appendix and maybe it will all sink in, its technical. In the EconTalk podcast one interesting way Nassim presents GMOs is through a Hayekian lense:

"Hayek effectively looked at nature as a format by which things--he sort of like thought of nature directly and indirectly and thought of the organic directly or indirectly as operating according to his principle of distributed knowledge. And technologies. And tinkering--away from that central planning mode....But let's say now, a Soviet planner, one that comes to nature. Aha--GMOs."

Reading between the lines, I think he wants to think (which I concur) of nature as a spontaneous order of checks and balances and that recombinant DNA techniques are like a top down planning approach that ignores or bypasses this process. But...biotechnology actually represents a small incremental genomic disruption in a system compared to a wholesale genomic disruption like conventional breeding or mutagenesis (used in organic methods as well). If a Hayekian model applies, I would think you could make the same argument against other methods of crop improvement as well.

Again, I think Nassim's idea is that the spontaneous order of nature provides checks and optimizes the 'use of knowledge' within the natural system, but GMOs circumvent this in a way similar to planning in an economic system does (which leads to negative outcomes). This seems to also come out in his paper:

"Unlike GMOs, in nature there is no immediate replication of mutated organisms to become a large fraction of the organisms of a species. Indeed, any one genetic variation is unlikely to become part of the long term genetic pool of the population. Instead, just like any other genetic variation or mutation, transgenic transfers are subject to competition and selection over many generations before becoming a significant part of the population. A new genetic transfer engineered today is not the same as one that has survived this process of selection."

"The limited existing knowledge generally does not include long term testing of the exposure of people to the added chemical, even in isolation. The evaluation is independent of the ways the protein affects the biochemistry of the plant, including interactions among the various metabolic pathways and regulatory systems—and the impact of the resulting changes in biochemistry on health of consumers."

I must give Nassim credit, in the podcast he makes it a point that verbalizing these notions of risk and ruin is much less precise than doing it mathematically. But, if we know nothing about the math, if we assume it is completely correct, I would think that if his mathematical reasoning would argue for the precautionary principle in the case of GMOs (because of genetic disruptions circumventing the protections we get from nature's spontaneous order) then it would apply in the same way to more drastic genomic changes associated with mutagenesis or crossing with wild relatives. What would we have left to eat?

The literature certainly indicates that GMOs may be the less benign approach to crop improvement, and to appeal to Hayek in another way, our knowledge of the specifics of genetic disruptions from biotechnology is much more precise and less assuming than conventional approaches.

Research on Genomic Disruptions

Batista R and others (2008). Microarray analyses reveal that plant mutagenesis may induce more transcriptomic changes than transgene insertion. Proceedings of the National Academy of Sciences of the United States of America 105(9): 3640–3645

“This is Adam Smith and Hayek and Ricardo played out at very high speed,” says Page, citing classical liberal economists who argued that trade generates the prosperity much of the world enjoys today."

"Agriculture is “going to remain a very local business”, Page says, but if water and climate emissions are fully priced into the cost of food, it will likely become more global over time. One thing’s certain — it will never again be all-local. After all, aseconomist Russ Roberts has said: “We tried buying local once. It was called the Middle Ages.”

"Greg Page, former CEO of Cargill, the largest privately-held company in America, talks to EconTalk host Russ Roberts about the global food supply and the challenges of running a company with employees and activity all over the world. Page talks about the role of prices in global food markets in signaling information and prompting changes in response to those signals. Other topics include government's role in agriculture, the locavore movement and genetically modified organisms (GMOs)."

It is really interesting to me, and you have probably seen before via social media the charts that try to depict our food system as being controlled by only a few companies creating a vast array of products but an 'illusion of choice.' Critics often complain about 'Big Ag' controlling the food supply and pillaging the planet. But what I have always seen in this is actually the work of a spontaneous order of a complex network of modern family farms, biotechnology companies, food processors, and retailers that cooperate to deliver healthy and sustainable food to a growing global population. And in terms of sustainability, I have said previously that modern food supply chains, made possible by companies such as Cargill, ADM, and retailers like Wal-Mart, have not only allowed us to get foods cheaper than we can produce ourselves or source locally, but may have also helped to reduce our impact on the environment (see I, Chicken).

Greg has a strong understanding of what economists (particularly F.A. Hayek) refer to as a spontaneous order and how the use of knowledge in society is optimized via price discovery:

"I think an underappreciated aspect of food and agriculture certainly the interconnectedness of the various links in the supply chain but powerfully within that is the role of price in changing behavior in a positive way.""In point of fact,that you watch as price signals very quickly go through the global agricultural landscape and cause players and each individual link to behave differently. And I've seen it in a very positive way. That after, for instance, the very recent result, severe weather in 2012 in the U.S. Midwest, ... And I think people miss that, and it's under-reported, that that signal went out and its speed of response all across the food supply chain to price signals is something that I would not have appreciated as I came out of college in spite of taking a few courses in microeconomics. ...in point of fact people miss the huge positive value they have in terms of food security. "

"One of the big threats to food security is the attempt by individual countries to define food security only in the context of their own citizens. That manifests itself in some cases--people try to start trying to grow crops for which they enjoy no comparative advantage. And so they take valuable acres, valuable rainfall, and force farmers, through tax policy or other means, to plant crops which don't really suit their situation, because they are simply not prepared to have trust-based trade with others who do enjoy advantage in that crop....Might make great local politics in a given country. But if that were practiced on a broad scale by a large number of countries, a lot of our food security would evaporate."

"the best thing about the U.S. farm bill versus what existed before the last decade--so, what we call freedom to plant--that a farmer can sit down in February and look at his land and look at an array of price signals that he is receiving and determine what crops he should grow. If you go back 15 years ago, in many cases you had to farm to the legislation--that in order to maintain your base acres, and therefore your safety net, you were compelled to grow crops. Today you have in the United States an enormous amount of latitude to make the single best decision for you and your family as to what crop you will grow this year, given your soil moisture levels and a host of other signals. But to sit down at your kitchen table with your advisor or whatever and to make a 10-key calculator determination of what to plant in response to the market signals that you are getting. And so one of the big plusses, and it also has been in the last 15 years, this freedom to use your land according to market signals. Are those market signals shaped by things like biofuels policy? Absolutely. And so, what affects one crop, what affects the price of one crop will clearly affect the level of production for all other crops as well."

"we could feed the world without GMOs; there are other practices that we could follow. So the idea that we are prisoners of this technology I think is something that should be dispelled. On the other hand, I don't think we should try that. I think if our water is precious, if our topsoil is precious, if we really care about the hydrocarbon footprint that we have in terms of the amount of cultivation that we need to carry out, that we should think very carefully about eliminating or demonizing genetic engineering."

Russ closes by asking Greg about his interest and education in economics:

Russ: "I want to close by asking about your interest in economics and where it comes from, and how it affects your work life, to the extent that it does."

Greg: "Well, it affects it enormously. I see Cargill as a great laboratory of both macroeconomics and microeconomics; ... each year provides the opportunity to see many of the things that economic theorists would tell us actually play out on the kitchen tables of individual farmers with 10-key calculators responding to signals." "We see people ignore--to me, to their great disadvantage--the lessons of those three economists [Hayek,Smith & Ricardo] in terms of how they price water, in terms of how they charge for infrastructure. And so we get to see both the positive power of the messages that those economists talked about but we also get to see the damaging effect of ignoring them. And in very few cases to we see them as being wrong. That these are rules that at least in food and agriculture apply rather consistently and rather quickly."

Sunday, January 04, 2015

Some years ago in his widely popular book, the Armchair Economist, Steve Landsburg included an essay entitled 'Why I Am Not An Environmentalist.' (you can find a copy of the essay here). He states:

"Economics is the science of competing preferences. Environmentalism goes beyond science when it elevates matters of preference to matters of morality....The underlying need to sacrifice, and to compel others to sacrifice, is a fundamentally religious impulse"

Take for instance recent headlines here and here indicating that the USDA and HHS are considering changing federal dietary guidelines that include recommendations for less beef based on so called environmental concerns instead of setting science based guidelines based purely health and nutrition. You might say, well, making a choice that is less energy intensive and one with a lower carbon footprint or involves fewer industrial chemicals or inputs might seem better for the environment. However, when it comes to environmental sustainability, the absolute amount of energy we use, or pollution we create is not necessarily the relevant metric. Sustainable choices are those that allow us to consume today without compromising the consumption set of future generations. This is an inter-temporal optimization problem that considers both costs and benefits, and the optimal allocation is based on a comparison of marginal costs and benefits across time vs. absolute levels.

Rigorous science might tell us with some level of uncertainty some measurable impact of dietary changes or CO2 emissions on future generations. But, to know if what we are getting in the future is larger than what we are giving up today, we have to discount future benefits (put them in today's terms). Then we can compare benefits and costs and talk about some optimal quantity of beef. (a big unknown in this is forecasting future impacts and getting the correct discount rate- see Doing Nothing: A science based policy prescription for climate change mitigation). It may be true that rigorous science tells us about the absolute level of energy use or emissions differs across an array of consumer products and production processes, but it does not tell us so much about relative trade offs across time.

And exactly how do we pin down the 'costs' of less beef consumption today? Its more than not getting a double cheeseburger or steak the next time you eat. Its more than fewer head of cattle going to slaughter or lost revenue from grain sales next year or the year after. Over the years huge investments have been made in technologies that have improved the efficiency of beef production, leading to significantly lower levels of water, feed, energy consumption, and pollution; especially greenhouse gas emissions. If people took these guidelines seriously, what does that mean for future investments and technological progress? It might turn out that slightly lower levels of consumption now could mean lower trend but absolutely higher levels of consumption of beef tomorrow (as the population grows), but without the potential green innovations that are on track today if current policy discourages those investments. That means tomorrow's cheeseburger comes with a larger environmental footprint than otherwise even if we are all eating less beef overall than we otherwise would have. Already government policies and attitudes toward beef are impacting these trends. The recent stigmatization of green technologies like finely textured beef (ignorantly maligned as 'pink slime'), as well as the use of sub-therapeutic antibiotics and growth hormones is leading to beef going to market that is less green than it other wise would have been.

How do you net out the overall impact of this? I have no idea, but that is the great thing about markets. As individuals, no matter how informed we think we are, our knowledge is limited and incomplete. The purpose of markets is to exploit the collective knowledge of millions (billions) of people in order to get the 'correct' levels of production and consumption. Even if we didn't have to properly discount future benefits to compare to current costs, the limited knowledge of a few economists, scientists, and policy makers is not sufficient to determine the optimal quantity of any good in a society, even if they imagine they can design a mechanism that accounts for the gaps or externalities that they think current prices are missing the mark on.

So, what are environmentalists and state and local governments to do in the face of lacking empirical evidence to support their personal beliefs about environmental policies and positions? They are certainly free to evangelize as private citizens. They can evangelize about how recycling and eating less beef is necessary because it serves some unquantifiable greater good, and they can even lay guilt trips on non-believers. They can even take up collections and ask for donations. Unfortunately they do a lot more. They can actually force you to pay to support certain quasi-religous practices or in the case of recycling may even force you to participate in their rituals or pay a penalty (or should I say penance ). Your tax money might be required to pay for recycling bins, or your local school might spend extra to add local food to its menus, promote rituals like 'meatless Monday,' or they may simply post nutritional 'commandments' that we are all encouraged to follow, and that will impact multitudes of government programs and personal choices. As Landsburg says:

"....we face no current threat of having Christianity imposed on us by petty tyrants; the same can not be said of environmentalism. My county government never tried to send me a New Testament, but it did send me a recycling bin."

Advocates of these new proposals to eat less beef might invoke the name and prestige of science to support their position, but the science is just not very good. Ultimately they are asking us to take their recommendations on faith. To the extent possible, government agencies should stick to clearly defined roles, and to the extent possible should make policy as a matter of sound science, not faith in some unquantifiable pie in the sky greater good.

"Today, champions of the buy local movement often follow the same faulty economic reasoning: nobody wins unless somebody loses and "I'd rather have the person who looks like me, lives by me, and talks like me win, so I'm going to buy from him."
What's sad about this thinking isn't just that it draws arbitrary moral distinctions between humans based on physical traits and location, but it undermines the openness to trade and commercial interaction that has made so many people better off."

The law of comparative advantage implies that things should be produced by those that can produce it with the lowest opportunity cost. For food this might imply utilizing more efficient and environmentally sustainable supply chains (created by companies like ADM, Cargill, Wal-Mart, CSXetc.). But economics also requires us to consider all benefits of a transaction, so even if a local product might have a higher price tag, or be more resource intensive to produce, it might have some unique intrinsic value (like the superior taste of a local beer) that outweighs these other concerns. The article itself is controversial because it implies that sometimes the 'intrinsic' value of buying local for the sake of buying local (a fad) can take on an elitist tone, impoverishing disadvantaged workers (often different races and cultures) in developing countries, and possibly impose greater costs to the environment just to satisfy the fad tastes and preferences of wealthy middle class Americans.

Environmentalists and social justice advocates are quick to condemn red meat or SUVs or other aspects of Western culture and consumerism, but some how give the 'buying local' movement a free pass. In fact, some even bend over backwards to argue that buying local is even actually better for the environment and promotes social justice, eliminates food deserts and makes healthy foods more affordable etc. Based on similar arguments, governments and school systems even utilize taxpayer dollars to source local food, or pass laws that promote consumption. That's pretty twisted economics.

But be clear, there is nothing wrong about having preferences toward local food or products. Economics has nothing to say about interpersonal comparisons of utility, and economists view each person as being the best arbiter of what's best for themselves. I have the opinion that the market will coordinate everyone's behavior to provide the optimal level of whatever types of food options individuals prefer, and local food certainly has a niche to fill. That's why I feel no sense of hypocrisy when I frequent the local farmer's market sporting a Monsanto cap. And, my favorite restaurants are local businesses that often source local produce and meats. If I had the time and resources, I might even start a beef operation that sources local beef to such places. But I would be in the wrong to force others to indulge my preferences through subsidies, taxes, or regulations.

"James Paulson at The Scripps Research Institute in La Jolla, Calif., who is considered an expert on Neu5Gc and other similar compounds, suggested as much. “This report might stimulate entrepreneurial breeders to develop cattle stocks deficient in this nonhuman sugar,” he quoted in the story. Varki even suggested that the study might point the way toward developing an antidote to counteract the risk of cancer."

I have already seen some in social media proposing that this is another reason we should eat only local, organic, or grass fed meat if we are going to eat red meat at all. Red meat often gets a bad rap because all sorts of products fall under the umbrella of 'red meat.' However, I wonder if most people and most studies distinguish healthy meat choices (like the 29 cuts of lean beef that provide comparable levels of saturated fats + loads more nutrients than an equivalent serving of boneless skinless chicken).

Even if the results are replicated and causal connections are actually established in human health, additional research would have to confirm that production practices can influence Neu5Gc levels before we can make any claims that organic/natural/hormone free/antibiotic free/local sources are better in this regard. The more likely scenario I think is that proposed by the pork writer above, and that the real impact of this research will be played out in modern livestock production systems and breeding programs that use advanced techniques (i.e. quantitative genetic applications such as QTL/MAS) or who knows even some of the first commercially viable animal biotech applications accepted by consumers as beneficial to human health.

I've written before about the current scientific consensus on climate change. Also, given this consensus, how difficult it is to actually price carbon (for tax purposes) or to define an optimal quantity of carbon emissions (for a tradable permit policy). There have fairly recently (in the last couple of years) been some really interesting EconTalk podcasts related to these issues worth sharing:

Judith Curry of the Georgia Institute of Technology and blogger at Climate Etc. talks with EconTalk host Russ Roberts about climate change. Curry argues that climate change is a "wicked problem" with a great deal of uncertainty surrounding the expected damage as well as the political and technical challenges of dealing with the phenomenon. She emphasizes the complexity of the climate and how much of the basic science remains incomplete. The conversation closes with a discussion of how concerned citizens can improve their understanding of climate change and climate change policy.

Robert Pindyck of MIT talks with EconTalk host Russ Roberts about the challenges of global warming for policy makers. Pindyck argues that while there is little doubt about the existence of human-caused global warming via carbon emissions, there is a great deal of doubt about the size of the effects on temperature and the size of the economic impact of warmer climate. This leads to a dilemma for policy-makers over how to proceed. Pindyck suggests that a tax or some form of carbon emission reduction is a good idea as a precautionary measure, despite the uncertainty.

The general takeaway is that while there is definitely a consensus regarding the fact that human related CO2 emissions contribute to climate change in many ways, it is difficult to quantify this impact over time.

As stated in Froeb et al's Managerial Economics text, 'all investment decisions involve a tradeoff between current sacrifice and future gain.' The metric that allows us to evaluate this tradeoff is the discount rate, and as Pindyck discusses, the fundamental (knowledge) problem of climate change is that there is no consensus about how to determine the relevant discount rate. And as I have stated before, there is no consensus in relation to very specific scientific forecasts related to future damages from climate change. Without being able to accurately predict future damages, or discount them to evaluate them in today's dollars, it's hard to value future climate related gains that today's sacrifices (driving less or smaller or hybrid cars, switching from coal fired electricity to natural gas or solar, changing our diet or other lifestyle changes, lost income or returns from capital investment etc.) will buy. In other words it's hard to know to what extent it makes any sense to do anything about climate change.

But, because of what I have referred to before as the invisible green hand, doing 'nothing' about climate change from a policy perspective (i.e. carbon taxes, permits, regulations) doesn't imply that we as a society are 'doing nothing' about climate change. Self interested behavior in the livestock sector has led to technological advancements (adoption of pharmaceutical, nutritional, and other technologies) that have drastically lowered the carbon footprint of beef and milk production. Biotechnology adoption in crop production has led to reductions in carbon emissions that dwarf what has been made possible with other technologies like hybrid cars (see my post Hybrid Corn or Hybrid Cars).

So it doesn't really matter what a survey says about farmers' beliefs about the science of climate change. The market has coordinated their behavior in such a way that today's farmer is on the cutting edge of adopting green technologies that mitigate the potential impacts of climate change, regardless of our inability to quantify the relevant trade offs in a policy relevant context. The best thing we can probably do in terms of policy is promote resilient markets that are able to respond to ever changing resource constraints in the face of climate uncertainty. An environment conducive to technology adoption, research, and investment.

Unfortunately, many of the same people so vocal about adopting policies based on the so called science of climate change (taxes, permits, dietary restrictions, regulations etc.) are also many of the same people that would restrict us (via GMO labeling laws, bans, strict limitations on hormone and antibiotic use, demonization of LFTB via derogatory terms like 'pink slime' etc.) from doing the very things that would have the greatest positive impact on our climate and environment.

About Me

My primary interests are in applied econometrics with applications related to genomics, nutrition, health, and the environment. I have a quantitative and analytical background in the areas of applied economics and statistical genetics. I leverage my training with experience in machine learning and predictive modeling using SAS, R, and Python to solve problems. I can understand and produce peer reviewed research and discuss the application with a scientist, sales representative, or the customer whose problem ultimately drives the analysis. I can code my own estimators, execute SQL queries, parse text files, and visualize a social network.